Julia Cruz

LL.M. candidate and researcher at the International Human Rights Law Clinic of the Harvard Law School

“Argentina […] suggests that […] human rights obligations to assure its population the right to water somehow trump its obligations under the Bilateral Investment Treaties […]. The Tribunal does not find a basis for such a conclusion either in the BITs or international law. Argentina is subject to both international obligations, i.e. human rights and treaty obligation, and must respect both of them equally.”
ICSID Case No. ARB/03/19

As developing countries strive to improve their population’s wellbeing, foreign direct investment has been looked to as an important source of revenue. Through their investments, foreign companies can enable increased access to infrastructure and public services, such as water and energy, while also providing jobs and tax revenue. In order to attract these resources, countries enter into international treaties that seek to decrease the risks foreign companies would normally face. They establish protections for investors, and give them the possibility of resorting to international arbitration tribunals if they feel that such guarantees have been violated. Such systems are known as Investor-State Dispute Settlement (ISDS). The underlying idea is for states to send investors a message: “our country is open and stable; and if you encounter any problems, there will be an independent grievance mechanism available to assess your claims.”

But what seems like a straightforward matter can easily become problematic because of the implications for a country’s most fundamental public choices. For example, Uruguay adopted tobacco control legislation in compliance with the Framework Convention on Tobacco Control, requiring tobacco companies to display health warnings on cigarette packages, manufacture a single package per cigarette brand, and ban tobacco advertising or sponsorship, among other measures. Consequently, Philip Morris undertook an arbitration proceeding against Uruguay claiming that this mandate had decreased the value of its investments. In Argentina, a group of foreign investors challenged the state’s decision not to raise water rates after a financial crisis. In South Africa, European mining companies initiated arbitration against the Black Economic Empowerment policy, a program directed at reducing poverty related to historic racial discrimination. In Egypt, a French company challenged labor regulation changes, including a minimum wage increase. Uruguay won, Argentina lost, South Africa’s case was discontinued, and Egypt’s case has not been decided yet – but what these disputes have in common is that, in one way or another, they all involve a debate on human rights policies vis-à-vis ISDS obligations.  

 In principle, there is nothing wrong with companies turning to courts to enforce contracts and to receive compensation for breaches, even if they operate in strategic sectors. However, it is crucial that tribunals strike a proper balance between investor protection and the public interest, especially when it comes to disputes which are so intrinsically related to human rights. It is also essential that the tribunal in question be transparent, legitimate and accountable. But because the majority of investment treaties have been designed to protect investors’ rights – and investors’ rights only – ISDS has been failing to meet such standards. Rather, it has proven to be a system isolated from other bodies of law – and in particular from international human rights law. In the next paragraphs, I raise three topics which highlight the tension between ISDS and human rights.

First, the language in ISDS treaties tends to be vague, and arbitral panels have interpreted their meaning broadly. For example, treaties protect the right of investors right to a “fair and equitable treatment,” a catch-all provision which has been used in virtually all investment cases. Because international arbitrators are not bound by previous decisions, they have the discretion to interpret this vague language in whichever manner they see most fit. This limits states’ ability to predict the outcome of future arbitration disputes when weighing public policy decisions that impact foreign investors. These disputes not only may result in billions of dollars in damages, but are also themselves very costly (Uruguay, for example, is estimated to have spent around 10 million dollars in the Philip Morris litigation, not all of which was recovered, despite the state winning the case). Therefore, ISDS provides strong incentives against public interest measures which might somehow impact investors’ interests, even when it is not clear they would violate investment treaties.

A second problem is that investment law is a “self-contained” system, and arbitrators tend to analyze investment treaties irrespective of states’ obligations in other areas. This is evident from the preamble of early investment treaties, which lay out the objectives of protecting investors and fostering economic cooperation, without reference to sustainable development or acknowledgement of human rights obligations. Because preambulatory language guides the interpretation of the treaty, it comes as no surprise that human rights obligations are not weighed in arbitrators’ analyses. For example, in the above mentioned case against Argentina, the state expressly argued that it had acted in order to protect human rights; to which arbitrators responded that human rights duties and investment treaty obligations were “equally important.” The tribunal then proceeded to analyze breaches of the investment treaty, without evaluating any human rights considerations.

Finally, the ISDS procedure may itself violate rights. International human rights law protects the right of every individual to receive information, and regional courts continuously affirm communities’ right to access information and to participate in decisions which may affect them. However, arbitration proceedings are not always bound by norms of transparency and publicity, and third-party participation is often restricted. This means that arbitrators may make decisions which significantly impact certain populations without hearing their perspective – and that sometimes these populations are not even aware of the case and its implications.

These problems have lead activists, academics, and states to question the traditional ISDS model. As a result, recent treaties have incorporated some improvements, especially in relation to transparency. Some developing countries have proposed more profound changes. In particular, the Southern African Development Community has adopted a model investment treaty[1] with strong rights-based language, which expressly treats foreign investment as a means to achieve development in all its dimensions. Besides the three above mentioned issues, the SADC model also addresses concerns related to arbitrator partiality, performance requirements, and investors’ obligations.

These improvements and suggestions offer a route towards improving ISDS. Future investment treaties must balance foreign investment with other development strategies, making sure they are mutually reinforcing. Above all, treaty negotiators and arbitrators must recognize that investment norms do not operate in a vacuum, but are rather part of a complex set of international (and domestic) norms and policies. The international community must work to ameliorate a reality in which the human rights and investment systems treat the other as non-existent, despite the fact that they are applicable to the same states and communities, and that they sometimes undermine or even contradict each other. Human rights law, development policy, and investment treaties can have common aims – and it is time to start making sure their means are also aligned.

[1]http://www.iisd.org/itn/wp-content/uploads/2012/10/sadc-model-bit-template-final.pdf